Time is Money: Allocating the Cost of Maritime Delays
It seems appropriate during this most unusual holiday season, when supply chains across the globe have suffered massive pandemic-induced traffic jams, to address how parties to maritime transportation contracts allocate the cost of delays to the movement of merchant ships and cargo. Merchant shipping is a capital-intensive industry that requires enormous financial commitments to build and operate the gargantuan container ships that everyone sees on the news these days at anchor off Southern California. Of course, those vessels are only part of the global merchant fleet, a third of which are tankers devoted to the carriage of crude oil and petroleum products. Still other vessels service offshore wind farms, carry grain, agricultural products and commodities like coal in bulk, transport liquified natural and petroleum gas, and fish the oceans, among other ventures. All told 90 percent of the world’s goods are transported by sea.
Ordinarily, merchant ships transporting goods earn revenue by charging hire or freight to a charterer, who charters or leases a vessel for a set period or single voyage to carry either the charterer’s cargo or the cargo of multiple shippers for whom the charterer in concert with the vessel owner acts as carrier. Charter hire is earned under a time charter (whether a vessel is delayed or not), while freight accrues under a voyage charter for the transportation of goods from point A to B. Vessels can be both time and voyage chartered. The contracting chain flows from head owner or bareboat charterer (literally a charterer who charters a vessel bare of a crew) to time charterer, and then perhaps to a voyage charterer and further to one or more sub-voyage charterers. In each case, either hire or freight is due to the party up the chain. When a vessel arrives at port, it tenders a Notice of Readiness (NOR), which triggers the start of the laytime-demurrage clock. Laytime is the amount of free time that the vessel owner (or upstream charterer) permits a downstream voyage charterer to load and unload its cargo. Once that laytime expires, demurrage accrues under a voyage charter at a set rate per day. Voyage charters often include various exceptions to the accrual of demurrage, for example, delays caused by port closures, vessel breakdowns, and weather. Disponent owners (that is, upstream bareboat and time charterers) and voyage charterers are often at odds about the amount of demurrage due and owing for delays encountered at ports of call, which can lead to either judicial or arbitral disputes. The factual permutations are nearly endless.
Demurrage can also accrue under a contract of sale for the goods being carried when one of the contracting parties provides for its carriage aboard a vessel and the other makes arrangements for delivery at a terminal. For example, the buyer can agree to provide a ship at a terminal at which the seller will deliver the goods. The issue then is whether the contract of sale requires the seller to pay demurrage for delays encountered there. In such cases, demurrage under the contract of sale is often, but not always, premised on the charter’s terms and conditions. If not, then demurrage is governed by the contract of sale’s terms and conditions. In this scenario, the buyer has to make transportation arrangements for a vessel, most likely as a voyage charterer. The contract of sale’s demurrage provisions enable the buyer to recoup some or all of the demurrage incurred by passing it through to the seller. If the seller instead delivers the goods by ship to the buyer’s terminal, the roles are reversed and the seller seeks to recoup demurrage for delays incurred at the buyer’s terminal.
A completely different contracting scheme applies to shippers, who do not charter ships but only want their goods transported by sea. These goods are transported pursuant to a bill of lading issued by an ocean carrier (or in some cases by what’s known as a non-vessel operating common carrier (NVOCC), which is a company that makes transportation arrangements for shippers and contracts with an ocean carrier for the actual transportation. Most nonliquid manufactured goods today are transported in containers. Generally, there are no time guarantees in a bill of lading. The goods arrive when they arrive. Consequently, shippers who only contract for the carriage of their goods are not exposed to the costs of delays encountered by vessels. Instead, it is the handling of the containers in which their goods are stowed about which shippers must be cognizant. Freight forwarders typically consolidate shipping orders and arrange to pack containers at their facilities. They receive a set amount of time (free time) by which to load the containers and return them to the carrier for shipment. The carrier ordinarily owns or leases the containers. The carriers charge for the excess time outside the port (called detention) and inside the port waiting to load (demurrage), and the freight forwarders pass along those charges to the shippers whose cargo they handle and pack. The unloading process works much the same at the discharge port, and demurrage and detention charges accrue there as well.
Another set of container contracts involves parties who own or lease their own containers and seek to have them carried by ship. They contract either directly with the carrier or an NVOCC. The carrier/NVOCC agrees to provide a minimum quantity of container spaces (known as TEUs or FEUs – 20 or 40-foot-container equivalents) in return for a minimum number of containers to be delivered during the contract’s duration. The carrier or NVOCC charges a certain rate per container along with attendant fuel and handling charges. At the discharge port, the containers are discharged and stowed temporarily at the onshore container terminal where they are ultimately loaded aboard outbound trailers (chassis) or railcars and carried by truck or rail to destination.
Before the pandemic, the maritime supply chain was generally synced to just-in-time deliveries with ships loading as contracted containers arrived at the port and discharging just as vessels ahead at berth departed. The pandemic crushed demand in the early months, which lead to carriers withdrawing vessels from the global fleet. As time passed and workers in the United States settled in for the long haul, they turned their spending from services to goods and demand ratcheted up swiftly, which caused the spot market to respond by flooding eastbound routes from Asia with fully laden container ships creating bottlenecks at U.S. ports where truckers and chassis have been in short supply. The Biden Administration has attempted to alleviate the pressure by creating a Supply Chain Disruptions Task Force and convincing marine terminals in Southern California as well as major shipping retailers to operate 24/7 to rectify the backlog. In a rare show of bi-partisanship, Congress is also moving to reform the nation’s shipping laws, which will restrict ocean carriers from unreasonably refusing to carry U.S. exports. During the pandemic, westbound transits surged with empty containers (leaving U.S. exports languishing at the docks) to expedite voyages to Asia to load for the highly profitable return trips to America. Meanwhile, equilibrium in the maritime-supply chain likely will take some time to return as the world’s reopening is contingent upon a very uneven distribution of vaccines worldwide. In a competitive world where time is money, allocating the risk of delays between parties to maritime transportation contracts is more important than ever, and especially during a pandemic when vessels and container delays are rampant.
“Time is Money: Allocating the Cost of Maritime Delays,” by Keith B. Letourneau was published in Texas Lawyer on December 14, 2021.
Reprinted with permission from the December 14, 2021, edition of Texas Lawyer © 2021 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.